America’s mobile merger

Tripped at the altar

The Justice Department seeks to block AT&T’s acquisition of T-Mobile

RANDALL STEPHENSON has no time for doubts. In March, when the boss of AT&T, America's second-biggest mobile-phone operator, declared that his firm would buy T-Mobile USA, the number four, for a whopping $39 billion, he seemed convinced that the deal would pass antitrust muster. “This is an intensely competitive marketplace,” he said. “When you watch a show or a football game, what dominates the airwaves? It's advertising for the mobile marketplace.”

Mr Stephenson's optimism was misplaced. On August 31st America's Justice Department filed a suit to block the proposed merger, arguing that it would “substantially” reduce competition for mobile services in America. This does not mean that the deal is dead—yet. But to salvage it, AT&T must fight a long battle in court at a time when the Obama administration is signalling a tougher approach to antitrust enforcement. Or it must accept painful conditions in a settlement.

Critics say the merger would create a predatory duopoly: AT&T and its main rival, Verizon, would have a combined share of about 80% of America's wireless market (see chart). Nonsense, retorts AT&T. The merger would be good for consumers: it would give them a choice between two strong national companies; it would let the firm expand its fourth-generation (4G) networks, not least in rural areas; and it would alleviate the shortage of radio spectrum.

After five months of digging, America's antitrust regulators disagree. They reckon the merger would result in “higher prices, fewer choices and lower quality products for mobile wireless services”. Unless it is blocked, says James Cole, a deputy attorney-general, consumers will suffer.

Regulators are particularly worried that the takeover would eliminate a disruptive competitor. T-Mobile has a history of cutting prices aggressively. It was also the first carrier to offer wireless e-mail, the latest high-speed networks and a smartphone using the Android operating system.

The Justice Department doubts that the deal would yield efficiencies to outweigh its negative impact. And it argues that AT&T could improve its services simply by investing in its own network, rather than by removing a competitor. An accidentally leaked AT&T document suggested that this would be cheaper: the firm did not need T-Mobile's spectrum and needed to invest only $3.8 billion to catch up with Verizon's 4G coverage.

The early signs are that AT&T is ready to fight. An hour before the suit was announced, the firm said that it would bring 5,000 call-centre jobs back to America from offshore after the deal is approved. Later, it vowed to see the government in court. In July it hired investment bankers, signalling that it is willing to divest assets to gain regulatory approval.

Whether all this will be enough to save the deal is unclear. Shortly before the suit was announced, a poll of telecoms experts by Stifel Nicolaus, a research firm, found that less than half expected the marriage to be approved. Julius Genachowski, the chairman of the Federal Communications Commission, which must also give its blessing, clearly has doubts.

If the Justice Department were to succeed in blocking the takeover, that would be quite a blow for Mr Stephenson and AT&T. But there would also be some happy faces. The prospects of Sprint Nextel, America's third-biggest wireless carrier, would suddenly be rosier: its shares rose by 7% on the news. And T-Mobile USA, which is owned by Germany's Deutsche Telekom, may get another lease of life. If the deal is blocked, it will get a break-up fee of $3 billion, a chunk of spectrum and a favourable roaming agreement. Being jilted at the altar can be lucrative.